Legal Hurdles Await False Claims Act Attacks on Corporate DEI

The Trump administration is doubling down on its novel fraud theory targeting government contractors and grant recipients with “discriminatory” diversity programs, even in the face of pending judicial scrutiny.

In a notable shift in False Claims Act enforcement, the Justice Department is actively urging workers to blow the whistle if there’s evidence that their employers defrauded the government by misrepresenting their compliance with anti-bias laws through the use of “illegal” diversity, equity, and inclusion policies.

Attorneys specializing in government contracting and anti-discrimination law are skeptical that the government and private litigants can meet the FCA’s essential elements in this novel context, as the DOJ has other mechanisms it traditionally uses to investigate and enforce compliance with civil rights laws.

“It’s a tenuous theory that’s going to be tested in the courts, which will ultimately be the adjudicators of whether it’s viable or not,” said Teddie Arnold, a partner at Seyfarth Shaw LLP. “There are a lot of questions as to what that will ultimately look like, and whether or not the False Claims Act is the appropriate vehicle to pursue those who violate federal anti-discrimination laws.”

The success of combining the FCA with anti-discrimination statutes hinges on proving that an entity knowingly violated the law by falsely claiming compliance. It also must be shown that the condition of compliance was “material” or significant to the contract in question, ultimately influencing the government’s decision to make a payment.

“The government is going to have pretty significant hurdles at each of those steps,” partly due to the subjective and fact-specific nature of the connection between certification and payment decisions in the DEI context, said Brian Boynton, chair of Wilmer Cutler Pickering Hale and Dorr LLP’s government and regulatory litigation group.

Title VII of the 1964 Civil Rights Act, which prohibits bias based on race, sex, and other protected categories, has a complex legal framework for permissible diversity initiatives, he said. Some aspects are clearly defined, while others remain legally ambiguous.

But even if the government fails to prove liability, contractors remain wary “about being subject potentially to very costly, lengthy DOJ investigations,” said Boynton, who served as the head of the DOJ’s Civil Division under the Biden administration.

Legal Tension

Ambiguity around actions promoting illegal diversity practices raises questions about which fraud claims could meet the materiality standard established in the US Supreme Court’s 2016 Universal Health Services Inc. v. Escobar decision, attorneys said.

An inquiry into whether a misrepresentation is material must consider factors such as whether the government knows of a violation and continued to pay the contractor, the justices held.

The high court’s unanimous 2023 ruling in US ex rel. Schutte v. SuperValu Inc. further clarified that FCA liability depends on the defendant’s subjective understanding of compliance. This means that if an entity reasonably believed its DEI practices met federal law at the time of the alleged violation, that belief may defeat claims of submitting false information, attorneys said.

The DEI issue is already part of lawsuits challenging a January executive order requiring government funding recipients to certify they don’t run programs “promoting” diversity in a way deemed “illegal” by the administration.

The dispute may escalate to the Supreme Court, offering the justices an opportunity to also clarify “what types of non-statutory compliance issues could be material to the government’s payment decision,” beyond an “act of Congress that has more force in effect,” said Tony Torain, a partner at McDermott Will & Emery LLP.

Even if a court or jury finds liability, assessing the monetary damages or economic impact associated with an alleged DEI-related misrepresentation and the actual services rendered by the contractor would be complex, he said.

This is because diversity practices are often linked to qualitative, subjective, and aspirational goals, such as efforts to attract a diverse candidate pool and promote inclusivity, Torain said.

As such, the damages analysis requires a careful balance of anti-bias compliance and the specific purpose of each contract, attorneys said.

Limited Case Law

The DOJ has precedent in using the “false certification” theory for civil rights, although particularly rare in the Title VII context.

In January, Louisiana-based Bollinger Shipyard agreed to pay $1.02 million to settle claims of illegal billing to the US Coast Guard for work performed by employees not authorized to work in the US. The company was obligated to verify worker eligibility, and the DOJ resolved the matter outside of court.

In US ex rel. Ling v. City of Los Angeles, a federal judge approved a $38.2 million settlement to resolve a 13-year FCA suit alleging that the city failed to meet disability requirements in a federally funded affordable housing project.

And in the 1995 case US v. Inc. Village of Island Park, a New York federal court agreed with the DOJ that a locality committed fraud and violated fair-housing laws by pre-selecting only White applicants for a federally-funded subsidized housing program.

The Trump administration has already begun sending contractors modifications to their contracts to account for the new requirements around DEI, attorneys said.

But contractors aren’t obligated to agree to these supplemental changes to existing agreements, according to Seyfarth Shaw’s Arnold, putting them between a rock and a hard place.

“Companies are weighing the repercussions of not signing,” including potentially losing contracts or facing defaults that could incur reprocurement costs, he said.

Companies may not definitively know their compliance status until further federal guidance is provided, but they must document actions to demonstrate good faith in their compliance efforts as they understand the law, said Debo P. Adegbile, chair of WilmerHale’s anti-discrimination practice.

“The stakes are now higher,” but having an adequate compliance regime in place is necessary, he said. “Should the government come knocking, it puts you in a different posture.”